It has become routine for plaintiff lawyers to file breach of fiduciary duty suits in connection with mergers and other takeovers. As Cain and Davidoff report:
Based on preliminary statistics, takeover litigation continued to be brought [in 2012] at a high rate in 2012. 92% of all transactions experienced litigation. Similar to last year, half of all transactions experienced multi-jurisdictional litigation with the average transaction attracting 5 lawsuits. Median attorneys’ fees for settlements inched slightly higher to $595 thousand per settlement while the average attorneys’ fee declined substantially reflecting a fewer number of large settlements in 2012.
As suggested by the very low average settlement figure, the vast majority of these suits are strike suits brought in hopes that the corporation will pay off a nuisance settlement to rid itself of the litigation so the deal can go through, as Ted Frank observes:
96% of mergers result in litigation alleging breach of fiduciary duty. This isn't because there are widespread breaches of fiduciary duty; it's because strike suits threatening to generate litigation expenses relating to the merger are highly profitable. The case settles with a tweak to the disclosures, and the attorneys walk away with over $1000/hour for agreeing to stop trying to hold up the merger.
As Alison Frankel reports, it briefly looked like the Delaware courts might stack the deck in favor of the plaintiffs bar, but has now pulled back from the precipice:
In July, the justices of the Delaware Supreme Court entertained oral arguments on a question the 9th Circuit Court of Appeals asked them to answer: Can shareholders maintain post-merger derivative claims against officers and directors whose alleged misconduct drove their company into a disadvantageous deal? In ordinary circumstances, shareholders lose the right to assert derivative breach-of-duty claims on behalf of the corporation when a merger ends their stock ownership. There’s only one exception to that rule of continuous ownership, under 30-year-old Delaware precedent, for sham mergers undertaken specifically to end the threat of liability against the board. But shareholders in a Los Angeles federal court case against Countrywide persuaded the 9th Circuit that the Delaware Supreme Court, in dicta in a separate but related Countrywide case, may have widened the exception. The federal appeals court asked the state court to clarify its position.
For corporate boards, there was considerable danger in this seemingly technical question. Corporate directors have duties to the companies they serve, but it’s exceedingly rare for companies to sue their own board members for breaching those duties. Shareholders are far, far more likely to bring breach-of-duty cases against directors, acting derivatively on behalf of the corporation. Merger announcements, for instance, are almost always followed by shareholder derivative suits asserting that the target company’s board didn’t get a good enough price. Derivative suits are very tough for shareholders to win, given Delaware’s deference to the business judgment of corporate boards, but they can be useful for leverage in settlement talks, especially when companies are eager to resolve M&A litigation and wrap up their deals. Corporations have leverage, too, however: If shareholders don’t settle derivative claims before deals go through, their cases are over because they no longer have standing to sue on behalf of the acquired corporation.
That delicate balance of power would shift if shareholders could continue to press their derivative cases after mergers go through, boosting the value of their cases and almost certainly guaranteeing more breach-of-duty complaints. ...
In a 20-page ruling Tuesday, the en banc Delaware Supreme Court ... said tersely that they never intended, in the 2011 opinion that led to the 9th Circuit’s request for clarification, to suggest that Countrywide shareholders should be permitted to maintain post-merger derivative claims. Dicta in that ruling, the court said, was intended to refer to direct claims by shareholders, not to expand the fraud exception to the rule of continuous ownership or to suggest a material change in the longstanding definition of derivative claims.
She concludes:
Shareholder lawyer Stuart Grant didn’t respond to my email request for comment, but he told Am Law’s Litigation Daily that the Supreme Court’s ruling was “incomprehensible,” unjust and at odds with dicta in its own earlier decision.
Question: If the ruling is "incomprehensible" how does shark lawyer Grant know it is "unjust"? And what, pray tell, is "unjust" about making it harder for plaintiffs lawyers to bring these nuisance suits? After all, as Fukumura and Adams observe, under the existing rules--which the new Delaware ruling leaves intact--"Few would argue that the quantity of M&A litigation is anything other than excessive, and it is no secret why: these strike suits are extremely profitable for plaintiffs’ counsel." Plaintiffs lawyers will still be able to do, on average, "about six weeks of 'work,' then settle on a disclosure-only basis, and get paid half a million dollars."
